Diversity: Does It Make a Better Board? There Is Some Pressure for Boards to Diversify Membership. but Does It Have Any Impact on Board Performance? Massey University Has Been Researching the Composition and the Performance of New Zealand's Listed Companies

Article excerpt

New Zealand directors are a pretty homogenous lot--there's a sprinkling of women, a splash of ethnic variation, a dusting of difference in terms of skills and experience--but these are little more than a light dressing on the same basic middle-aged professional male dish.

So does it matter?

That could depend on the nature of the company and the complexity of the environment in which it operates. Researchers at Massey University have been delving into the topic to explore the links between board configuration, strategic context and corporate decision quality.

In a paper entitled "Board Configuration: are diverse boards better boards", the researchers talk about the growing pres sure from investors, shareholder activists and interest groups to appoint directors who can bring a greater range of demographic and experiential diversity to the boardroom table.

"The underlying assumption is that greater diversity should lead to less insular decision-making processes and greater recognition of change."

Decisions from a board with a greater diversity of director background, experience, ethnic orientation etc are, therefore, more likely to be in tune with a diverse customer base and better able to respond creatively to complex, fast-moving markets.

It also helps push up the independence quotient, something investors are keener on post-Enron, if directors are not drawn from the same cosy little camaraderie.

But what if the company is a steady-state style operation in a fairly stable environment?

In that case, various studies suggest the converse might apply and diversity may introduce an unproductive influence. The greater mix in board composition can make it harder to find common ground which contributes to decision-making difficulties and a higher turnover of directors.

Then there's the issue of context--having directors with strategically useful ties in a particular market/industry brings on board a bunch of networking knowledge. There are opportunities to pick up on trends, directions, business process changes, find out what worked for other companies, and generally get exposed to vicarious learning that helps bolster board know-how.

Other studies have tried to determine how various levels of strategic complexity--both internal and external--relate to the diversity of board composition. These suggest it's probably a good idea to keep reviewing the sorts of capabilities an organisation could benefit from as the complexity of its inner workings or external environment changes.

It also emphasises that unnecessary complexity in a relatively simple business environment can be just as unproductive as unresponsive simplicity in a complex business environment.

Building on all this, the Massey study set out to see if it could find any relationship between board composition, strategic complexity and Kiwi company performance.

The 59 locally listed companies that fitted the study criteria were examined on a range of performance measures. To try and isolate the impact of board diversity, various factors like business size and age, its leverage, capital intensity, and industry sector, were also taken into account.

Diversity measures like gender, board size, director independence and number of directorships per director were relatively easy to measure. Ethnicity was a tad less certain and industry background and relative experience were ruled out because they couldn't be ascertained with any degree of accuracy.

Amongst measures of strategic complexity were things such as restructuring, business sales, downsizing, divestment, organisation change, mergers or acquisitions, foreign expansion, board or senior management changes.

The results produced some evidence to support the hypothesis that companies functioning in a complex environment do better if they have a more diverse group of directors, but they were mixed and the findings were not statistically significant. …